We are optimistic on Supercomnet Technologies Bhd (“Scomnet”) as prospects on their earnings growth are encouraging from their medical cables used for Covid-19 related treatments has seen surge in orders from Europe and US. The company is likely to achieve record earnings for FY20 and FY21. We have a BUY with target price of RM0.98 premised on 25x PER FY20 which we applied a 20% discount to Bursa Malaysia healthcare PER 30x due to its smaller market cap.

Scomnet is principally involved in the manufacturing and subassembly of wires and cables for medical devices, electrical appliance, consumer electronics and automotive markets. The group’s crown jewel - Supercomnet Medical Products Sdn Bhd will be the key growth driver with the increased spending in healthcare amidst the Covid-19 pandemic. Scomnet produces medical cables that are generally used for connecting various medical devices outside the human body which are used in endoscope and part of endoscopy accessories, connectors and medical tubes.

Since February, it has seen a surge in orders particularly for the disposable bronchoscope which is the main component used in the first in line lung treatment for patients with respiratory infections and critical care monitoring cable for the use in intensive care units. Its cables are approved by the European Medical Agency (EMA) and Food & Drug Administration (FDA) for Europe and North and Central America with key clients such as Edwards Lifesciences and Ambu, both major players in different segments of cardiovascular medical devices space globally. Scomnet has been supplying it’s FDA and EMA approved components for over 10 years. Currently its medical segment contributes more than half of group’s revenue and is expected to be over 65% with the increased demand.

Scomnet is also set to benefit from the stronger USD as it exports over 70% of its products. In addition, copper which accounts for over 50% of its raw materials has seen price decline to a 4-year low. Balance sheet remains solid with net cash of RM46m and zero borrowings. Prevailing net margins of 15% is set to improve to 18% by FY20 and FY21. This would catapult group’s earnings to a new high and expect growth momentum to continue with EPS to chart double digit growth of 35 % and 20% for FY20 and FY21 respectively

Source: Rakuten Research - 13 Apr 2020